Abstract- The valuation of a business or a set of its stock can generate widely varied end-results. These differences are dependent on the parameters of the assignment. Third-party appraisers should consider first what needs to be done before preceding with their duties. The list of responsibilities include defining what is to be valued, setting the purpose of the valuation, choosing the valuation date carefully and deciding on the stardard of value. The terms and conditions of the engagement should also be taken into account. The important items that should be discussed include the valuation report, the schedule and the fee. All these elements should be considered and committed into writing.

Define What Is To Be Valued

One of the least understood facts about the valuation of closely held
companies is that a minority interest is rarely worth its pro rata
percentage of the value of the total business. The value of a minority
even for majority interests. The value of a minority interest should
reflect two separate and distinct discounts from the value of a 100%
interest--a minority interest discount and a discount for lack of
marketability. A majority interest with less than complete control also
could have its value affected by discounts resulting from a lack of
certain control rights or certain marketability discounts. Therefore, it
is important to be clear from the beginning about the interest being
valued. Commissioning a valuation of the enterprise and arbitrarily
dividing the results into pro rata segments could result in distortions
or outright mistakes in interpretation, all with far-reaching
consequences.

Define the Purpose of the Valuation

A second significant dimension of business valuation is that the value
of a block of closely held stock or an entire business can be different,
depending on the purpose of the valuation. This is because the purpose
will dictate the premise of value and the valuation method selected;
different methods are appropriate for different purposes. For example,
the purpose determines to a great extent whether the appraiser will rely
more heavily on an analysis of historical financial data or on
projections of future operating results. The purpose of the valuation
also determines the types and amounts of discounts or premiums applied.
Valuations of ESOP stock are a case in point. Because of the unique
"put" provision required by Federal law, a minority interest block of
ESOP stock tends to be worth more than an indentically sized block of
closely held stock valued for other tax purposes because the
marketability discount applied to ESOP stock trends to be smaller than
the marketability discount applied for non-ESOP purposes.

Select the Data of the Valuation Carefully

There are certain valuation engagements whose valuation date is set by
law-for example, an estate tax valuation. However, Federal law permits
valuing the assets of the estate on one of two dates, either as of the
date of death of six months later.

If a closely held business or block of securities forms a material
portion of the estate, and there has been volatility in the stock market
or some other material event within the six-month period, valuation of
the business or stock on both dates is recommended.

Decide on the Standard of Value

Generally speaking, for tax related matters, the standard of value for
closely held corporations is fair market value. For other purposes,
such as dissenting shareholder litigation or fairness opinions performed
in connection with corporate mergers and acquisitions, the standard of
value is fair value. Fair value in this context is defined by
appropriate state and case law.

Define the Terms and Conditions of the Engagement

A financial valuation of a corporation should fulfill the business
objectives as well as the legal needs of the corporation. Key items
that should be discusssed and committed to writing include:

* The Valuation Report. A report may be oral or written, or a
combination; the format should be determined at the beginning of the
engagement. An oral report can be a brief telephone conversation or a
formal presentation before a board of directors. A written report can
be a one-page document or an extensive narrative buttressed by charts,
graphs, and exhibits. The purpose of the valuation determines the type
of report needed. For tax-related engagements, such as ESOPs, estate and
gift filings, charitable contributions or recapitalizations, the report
should satisfy the requirements of Rev. Rul. 56-60 thoroughly.

* The Schedule. Often, an appraisal is required to meet a looming tax
filing deadline, or the services of an appraiser as an expert witness
are need on a specific and very close trial date. As a general rule,
the appraiser will need six to eight weeks after receipt of the
necessary financial information to complete the valuation and prepare a
narrative report. If the parameters of the engagement change during the
course of the assignment, additional time may be needed.

* The Fee. Common sense suggest that any appraisal fee based
partially or solely on a percentage of the value of the property being
appraised raises, at best, the appearance of a possible conflict of
interests. In fact, IRC Sec. 170 expressly prohibits such arrangements
for tax-related valuations, as do the ethical standards of the business
valuation industry. The standard fee arrangement in the industry is
either a pre-diem rate or a fixed fee per assignment, agreed to at the
beginning of the engagement. Naturally, fixed fees may fluctuate
subsequently if the nature of the engagement changes during the course
of the assignment.

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